Real-estate lawyer offers help sorting out contracts

The way lawyer Susan Gilman sees it, the real-estate collapse amounted to a financial tsunami that wiped out fortunes and left behind in its wake a tangled mess of contracts and obligations.

Now, she said, lawyers need to help sort it out. And each side needs to better understand the complexities - as well as the other side's point of view - to make the system work.

Gilman, of Gilman Law Offices in Paradise Valley, said that is what's behind a seminar she organized for today at the State Bar of Arizona's 2010 convention in Glendale.

"What it takes now is to be able to go in and understand what the lender's perspective is, what the borrower's perspective is, and (as a lawyer) . . . be able to go in and negotiate a restructure of whatever the loan is so that it will meet the borrower's criteria and will meet the lender's criteria," she said.

At the heart of the contract, Gilman said, is the contract - not the law.

When a homeowner defaults, state law provides various protections. One of the most important is that Arizona is a non-recourse state. Once the buyer walks away, the lender can't go after the borrower if the price the property fetches is less than what's owed.

Commercial lending is different.

"We're talking about the fact that if you have a default under your loan the lender has the ability to exercise a whole bunch of legal remedies against you," said Gilman, who specializes in real-estate law.

That can include foreclosing on the property, pursuing guarantors or going after other forms of collateral, including letters of credit and assets.

But Gilman said the foreclosure situation has been changing. Now, she said, lenders file suit on borrowers who are still making the required payments.

The problem for those borrowers, she said, is in the papers they signed in the first place to get the cash.

"You're seeing now that you've got a covenant in the document that says, 'You have to have your property at no time lower than a 75 percent loan-to-value ratio,' " Gilman said.

That's worked out just fine when someone wanted to borrow $19 million on a property worth $30 million. But a current appraisal may peg its value at $15 million.

"That's a very big problem for the lender," she said.

Gilman said that, technically speaking, the lender could foreclose. But she said they may choose not to go down that path, perhaps checking to see if those who guaranteed the loan are still strong and able to step up if the borrower stops making the payments.

"On the other side you've got borrowers that are saying, 'Wow, I know that I'm not meeting my obligations under my loan document, but I can still make my payment,' " Gilman said.

That is where the lawyers can help to modify the terms so that, technically speaking, the loan is not in default.

Lawyers also come into play if a lender, facing foreclosure, threatens to tie up the process by filing for bankruptcy protection. Gilman, who represents lenders, said that's not a great idea. "If they really want to have a cooperative negotiation then that's going to make it very hard for them," she said.

But Gilman added there are times that bankruptcy can help, especially with a balky borrower or when partners cannot agree.

"In a bankruptcy scenario, then the lender can propose a plan, the borrower can propose a plan and there's going to be a decision made," she said.

There's a loss of control on both sides, Gilman said, "But there are still advantages in certain situations where you might actually be able to negotiate better in a bankruptcy."